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Car Insurance Cancellation Fees

Here's what you need to know...
  • There are certain times that insurance companies can legally charge you a fee for canceling your policy
  • You should never be charged a fee for choosing not to renew a policy
  • If you have questions regarding your insurance company’s standards for charging fees, contact customer service to ask more specific questions
When you decide that it is time to buy insurance with a new carrier, it is only natural to assume that you will receive a refund when you cancel your existing policy.

If you have paid your premiums in advance, you are not obligated to keep your policy active for the entire period.

Since you do have the right as a policyholder to cancel your insurance at any time, you are entitled to a refund for whatever premiums have gone unused.

While all state departments require carriers to issue refunds after a cancellation request is received, you might be surprised to learn that many companies have adopted a policy where they will charge you a cancellation fee before the check is sent.

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The last thing you want after purchasing a new policy is to discover that your old insurer is going to keep a large portion of your refund because you have decided to cancel early.

If you had plans on how you would use your refund, discovering that your insurer can legally charge you a fee for cancellations before the renewal date can really put a damper on the fact that you are saving money with your new plan.

If you want to make informed decisions before you comparison shop and before you start making plans on how you will use the money that you are saving, read this guide on cancellation policies and fees.

When can an insurer legally charge you a fee to terminate coverage?

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Finding affordable insurance could very well cost you money when you are currently doing business with a company that charges cancellation fees.

It is important that you know that even companies that have adopted a fee structure cannot charge their policyholders a fee whenever they want to cancel their policy.

If your policy is coming up for renewal in the near future, it could save you money to wait until your renewal before you find a new plan.

The only time that the company has the right to charge you a fee is when you are canceling your policy voluntarily before the term’s expiration date.

The company cannot charge a fee if you are choosing not to renew your policy, or if the company has ordered a cancellation or a non-renewal because of your claims record or driving history.

Different types of cancellation policies

One way that you can decide if canceling your insurance early is wise or not is to find out what your existing insurer’s cancellation policy is.

Companies have adopted one of two types of policies: pro-rated refund structures and short rate refund structures. You should understand how each works before you even commit to buying insurance with the carrier in the first place.

– What is a pro-rated refund?

Before you learn that an insurer does have the right to collect a cancellation fee, you probably assumed that you would receive a pro-rated refund.

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A pro-rated car insurance refund is a refund for the premiums that you have not used but that you have already paid for.

The refund will be proportionately calculated based on how long the policy has been active and the date that you requested your policy to be canceled.

You will need to check the state laws to see if a company is required to issue a pro-rated refund. Just because a state allows an insurer to charge a fee does not mean that all carriers will.

Many carriers prefer to pro-rate refunds to avoid bad reviews and drops in customer satisfaction.

Some of the companies that are known to pro-rate refunds include State Farm, AAA, Allstate, Geico, and Farmers.

– What is a short-rated refund?

A short-rate cancellation is one where the policyholder is charged a fee for canceling early. It is essentially a penalty for failing to keep the coverage for the entire term.

Depending on what state law permits, the insurer will be entitled to keep some of the unearned premiums that would have otherwise been paid to the policyholder in the form of a refund check.

Many companies have some type of short-rate cancellation penalty.

The most common type of penalty is to charge the client 10 percent of the unused premiums, but some companies will actually charge a fixed fee between $30 and $50, as long as the balance owed on the policy exceeds a certain amount.

You will be entitled to a refund, but to some the idea of being penalized in an effort to dissuade them from leaving is enough to drive them away for good.

How do insurance companies justify a cancellation fee?

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If you are legally allowed to cancel your coverage at any time, it is not out of line to be upset when exercising your rights leads to a fee.

The insurance marketplace is a competitive one. In order to save money, you will need to shop around and switch carriers in many cases.

While policyholders may not like it, there is a reason why state departments have allowed insurers to charge their clients fees.

When an insurance company calculates rates, they are using claims projections and other detailed data to determine how much they need to collect to stay profitable.

As they take on business, they are taking on risk and taking in money. When a policy is in effect, the insurer must service the policy and cover claims that are presented.

Cancellation fees are a way for the insurer to cover the increased administration cost associated with early cancellations that just cannot be predicted.

It is the company’s way to recoup on some of the money that they will not collect.

Tips on Buying New Insurance

There is a right way and a wrong way to replace your insurance policy. If you want to really lower your expenses, here are the steps to take:

  1. Ask your insurer what their refund policy is
  2. Receive quotes for similar coverage elsewhere
  3. Discuss options to lower premiums with your insurer
  4. Select a policy and choose the effective date
  5. Submit a cancellation for your current insurance

No one wants to pay a fee to cancel insurance that they do not want to keep. Unfortunately, you do not have an option. When you are shopping for insurance, make sure to ask the company about hidden cancellation fees.

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